Management

Credit Derivatives and Risk Management

---

The striking growth of credit derivatives suggests that market participants find them to be useful tools for risk management. I illustrate the value of credit derivatives with three examples. A commercial bank can use credit derivatives to manage the risk of its loan portfolio. An investment bank can use credit derivatives to manage the risks it incurs when underwriting securities. An investor, such as an insurance company, asset manager, or hedge fund, can use credit derivatives to align its credit risk exposure with its desired credit risk profile.
However, credit derivatives pose risk management challenges of their own. I discuss five of these challenges. Credit derivatives can transform credit risk in intricate ways that may not be easy to understand. They can create counterparty credit risk that itself must be managed. Complex credit derivatives rely on complex models, leading to model risk. Credit rating agencies interpret this complexity for investors, but their ratings can be misunderstood, creating rating agency risk. The settlement of a credit derivative contract following a default can have its own complications, creating settlement risk. For the credit derivatives market to continue its rapid growth, market participants must meet these risk management challenges

---

Availability

No copy data

Detail Information

Series Title

Credit Derivatives and Risk Management

Call Number

-

Publisher

: ., 2007

Collation

-

Language

English

ISBN/ISSN

-

Classification

NONE

Content Type

-

Media Type

-

Carrier Type

-

Edition

-

Subject(s)

Risk management

Specific Detail Info

-

Statement of Responsibility

-

Other version/related

File Attachment

Comments

---

You must be logged in to post a comment